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The diving loonie

How much lower can our beleaguered dollar go?

The diving loonie
JULIAN BELTRAMEFebruary42002

The diving loonie

How much lower can our beleaguered dollar go?

JULIAN BELTRAMEFebruary42002

The diving loonie

Business

How much lower can our beleaguered dollar go?

JULIAN BELTRAME

Even before the Canadian dollar plunged to historic low last week, Arthur and Joan Elgar had given up on their Florida dreams. Snowbirds since 1991, when the loonie hit the heady heights of US89.29 cents, the Elgars had planned to spend their winters in Dunedin for as long as their health permitted. But with each passing year, their Canadian dollars bought fewer and fewer creature comforts. In October, they set out for the Sunshine State, not to wait out the Canadian winter, but to sell their mobile home. They got US$2,000, one-tenth what theyd paid a decade earlier. It seems they weren’t the only Canadians selling their properties, and there were few takers. “I know, personally, seven or eight Canadians who have put their homes in Florida up for sale,” Arthur, 77, told Macleans. “It’s just gotten so expensive.”

Even more so, for those snowbirds still toughing it out. On Jan. 18, the Canadian dollar hit an all-time closing low of US62.02 cents, dropping nearly one cent in three days. During trading last Monday, it sunk even lower, to 61.75 cents before settling in the rest of the week at barely above 62 cents. The unexpected swoon left many in Canada scrambling for reasons. The boilerplate explanations rolled out in the past just didn’t fit this time around. Quebec separatists? Well. . . not since the 1995 referendum. The federal deficit? It’s so yesterday—Canada may be the only country in the G7 club to have a balanced budget next year. Weak commodity markets? That would have made sense last year, but prices have firmed since mid-December. “I haven’t heard one explanation for the dollar’s plunge that makes sense,” says Don Drummond, chief economist at the Toronto-Dominion Bank.

If economists were flummoxed, Finance Minister Paul Martin was practically pleading for answers. Last week, he took the uncharacteristic step of calling a news conference to talk up the beleaguered currency. It may all be a failure on the part of

currency traders to appreciate the underlying strength of Canada’s economy, he suggested. Bank of Canada governor David Dodge followed up two days later with much the same message. And the standard bromide—most other national currencies are in the same sinking boat—was offered, as if Canadians could take solace in shared misery. But as the week progressed, there were few signs the markets had seen the error of their ways. Or that hard-nosed international traders were taking seriously the government’s complaints that they were selling the loonie short.

While the precipitous drop of the past week or so may be a mystery, the dollar’s incredible shrinking act over the last decade is not. As Drummond points out, it matters little that Martin and Dodge are

right in extolling the fundamental strength of the Canadian economy. The dollar is not a barometer of the economy in isolation, he notes. So while it may be true that Canada’s economy is stronger than in the past, it had not been growing as fast as the U.S. economy. Similarly, Canada may have lowered its public debt, but not as much as the U.S. Ottawa cut taxes, but Washington did it first and deeper. Between 1995 and 2000, Canadian labour productivity increased by 1.2 per cent annually, but it grew by 2.4 per cent south of the border. “All the improvements we’ve made,” says Drummond, “have fallen short of where the U.S. placed the bar.” Does it matter if Canada falls short of matching the world’s most powerful economy? At one level, no. In fact, as Prime Minister Jean Chrétien has often stated, a lower dollar helps Canadian exporters sell more products to American consumers. That’s one reason Canada has piled up

huge trade surpluses with the United States, in part fuelling the country’s economic boom throughout the latter half of the 1990s.

Nor has the limp loonie dramatically altered the way Canadians live. “Our standard of living is not affected by the lower dollar,” states Jim Stanford, an economist with the Canadian Auto Workers. That’s because about 75 per cent of what Canadians buy in goods and services is generated domestically. Even in the case of imports such as automobiles, retailers have passed on only a fraction of the dollar’s lost value to consumers. For example, a BMW 330i carries a recommended sale price of US$33,990 south of the border and $46,500 in Canada. If the Canadian price tag reflected the full U.S. value of the luxury import, the car would retail for about $53,400. “Prices are made according to the market, not the exchange rate,” explains Hendrik von Kuenheim, president and CEO of BMW Group Canada. Put another way, says Stanford, dealers don’t pass on the full load of the depressed loonie for fear few would buy their automobiles.

But at a deeper level, Canada cannot bargain shop forever without paying the price later on, say most economists. One obvious consequence of the lower dollar is that Canadian firms are unable to purchase the imported equipment they need to modernize and remain competitive. Even more alarming, adds Jeff Rubin, chief economist for CIBC World Markets, is that should the slide continue, Canadians may choose to adopt the U.S. currency as their own in order to avoid future devaluations. “Then people will wake up one morning and find their life savings in RRSPs and their homes are worth a lot less than they thought,” he says.

With the loonie appearing to stabilize at week’s end, there was no appetite in Ottawa for quick fixes such as adopting the U.S. dollar. Nor did Martin and Dodge hint at a rescue effort, such as raising interest rates or dipping into the Bank of Canada’s US$34.2-billion foreign currency reserves to defend the loonie. Instead, Martin insisted policies aimed at strengthening the economy will eventually buck up the dollar. It’s a long-term recovery strategy—possibly too long for Arthur and Joan Elgar. “I’d go back to Florida if the dollar came back,” said Arthur. “But I don’t see it happening soon.” 03

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